Forget groceries: China is Amazon's big opportunity

Even a tiny share of the e-commerce market there could be worth tens of billions.

By Minyanville.com Jun 11, 2013 3:00PM
Man with laptop copyright Mike Kemp, Getty Images, Getty ImagesSelling gourmet cupcakes in Los Angeles is easy. You know what's hard? Selling books in China. Actually, selling anything in China is hard. Even if you're Amazon (AMZN).
 
Monday's news that Amazon will expand its grocery business to the Los Angeles area, after a five-year-long trial on its home turf in Seattle, got all the attention. But the real headliner should have been the latest step in the company's long, hard road to profits in China.
 
After a lengthy delay -- probably caused by Chinese government regulatory hurdles, although Amazon isn't saying -- the Kindle e-reader and the Kindle Fire tablet finally went on sale Monday on Amazon's China site (Amazon), with a splashy display that is easy to translate even if you can't read Chinese: "Buy a Kindle and read Life of Pi now!" The device is also on sale at kiosks inside two major retail store chains on the mainland.
 
E-reader prices for the three models available in China are about U.S. $138 for the Kindle Paperwhite, and $228 or $240 for the souped-up Kindle Fire. (Here in the U.S., regular prices start at about $119 and go up to $499.)
 
The e-books are the real bargain, though.  Amazon.cn is expected to sell books for the devices for about $1.50, compared to the usual $9.99 price in the US. 
 
The problem is that most Chinese people don't pay for books. Not ever. But more about that later.
 
Amazon has been banging away at the China market for eight years now, since it purchased an online bookseller called Joyo.com. The company does not break out numbers by country, but in a late January conference call, a company spokesman said that the company is investing "heavily" in China, according to Bloomberg. This week's introduction of the Kindle confirms that.
 
Yet it appears that Amazon had amassed a Chinese e-market share estimated (Reuters) at only about 2.2% by the end of 2011. It may have a 3% share now.
 
In the latest figures available, based on 2011 year-end data on market share (ChinaInternetWatch), Amazon places a distant fourth in a market dominated by Chinese firms. On top with nearly 40% of sales was Tmall.com, owned by Alibaba Group Holding, which is partially owned by Yahoo! (YHOO). A site called 360Buy.com, owned by E Commerce China Dangdang Inc (DANG), commonly called Dangdang was next at nearly 15%. Coming in a distant third was Suning.com, the online arm of an electronics retail chain, with 2.4%, followed by Amazon.
 
So is it worth the effort? Well, a 3% share of the Chinese consumer e-commerce market is worth about $27 billion per year, according to Reuters
 
And the marketplace is growing fast. As of the end of 2012, China had about 538 million Internet users (InternetWorldStats), more than any other country in the world and more than twice the number in the U.S., which is in second place. China's online audience is expected to grow to 800 million by 2015.
 
So Amazon has a pretty good incentive for whacking away at the China market, particularly with its Kindle devices, which the company is apparently perfectly willing to sell even at a loss, since it is essentially a device custom-tailored for the purchase of more stuff from Amazon.
 
Just a couple of weeks ago, the company announced that its Kindle devices were available in 170 countries. Presumably it's now 171, but the last and biggest market is also proving to be the toughest.
 
For starters, Chinese consumers just aren't used to paying for books. Amazon already has at least three Chinese competitors, who sell their cheaper e-readers pre-loaded with a selection of rights-free Chinese classics.
 
As for all other media, pirating of books is notoriously common, with free downloadable versions of varying quality widely available. Harry Potter? No problem! Chinese language versions from anonymous authors were available for each volume in the series before J.K. Rowling even wrote them.
 
And although Chinese consumers are willing to pay for electronic devices, they apparently find their mobile phones to be adequate devices for reading. As in other emerging markets, smartphones are the most commonly used Internet devices, with a reach of more than 70%.
 
At least Amazon has that covered. The Kindle mobile phone app and the e-book store app have been available in China since December 2012. Last month, it also opened a store for Google (GOOG) Android apps on Amazon.cn. That made it China's first source of paid Android apps, beating even Google to the market, according to Reuters.
 
There are other problems. The president of the Chinese site resigned late last year after eight years in his post, leading to speculation (zdnet.com) that Amazon, like other multinationals, was unwilling to leave the real decision-making in Chinese hands.
 
But the real issue is that Amazon has a very modest market share to show for eight years of effort. Clearly it's important for Amazon to get that buying machine into Chinese hands. To this day, its Chinese rival Dangdang is called "China's Amazon."
 
And that may be the real reason why Amazon is making a big push there with the Kindle.

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